Weekly Report - 23 March 2023 (WR-23-12)

PANAMA: Breakthrough in stand-off over major mine

The government led by President Laurentino Cortizo and Canadian mining company First Quantum Minerals (FQM), which owns the major copper mine Cobre Panamá via its subsidiary Minera Panamá S.A. (MPSA), have announced a deal regarding a new concession contract. This follows major uncertainty regarding the future of Panama’s biggest single private foreign investment following the collapse of talks between the two sides at the end of last year [WR-23-01]. The latest agreement will come as a relief to the government given the significance of the project to Panama’s economy, representing some 4% of the country’s GDP, most of its export revenue, and providing some 40,000 direct and indirect jobs.

Since the December 2022 announcement that talks had unravelled over the final terms of the new contract [WR-23-01], the dispute had appeared to escalate even against the backdrop of ongoing negotiations. This culminated in FQM’s 23 February announcement that MPSA had suspended ore-processing operations at the mine, which is located in Colón province, and would begin a partial demobilisation of its workforce of over 8,000 employees and contractors. This followed a resolution by Panama’s maritime authority (AMP), also issued last month, ordering MPSA to suspend loading operations at the mine’s port, Punta Rincón, claiming that its scales were improperly calibrated.

It was amid this tense stand-off that the two sides announced a breakthrough on 8 March. According to FQM, the proposed concession contract, which is subject to a 30-day public consultation process and approvals by the Panamanian cabinet, comptroller general, and legislature, meets the objectives outlined by the government in January 2022 related to “government revenues, environmental protections and labour standards”.

According to both sides, provision of the proposed contract, which will have an initial 20-year term with a 20-year extension option, will include, among other things: payment by MPSA of US$375m plus an additional US$20m to cover taxes and royalties up to the end of 2022; and payment by MPSA starting in 2023 of an annual minimum contribution of US$375m in government income, comprised of corporate taxes, withholding taxes, and a profit-based mineral royalty of 12% to 16%. It also includes downside protections to the annual minimum contribution.

Pressure from unions

Ahead of the deal being reached the Cortizo government had faced the prospect of unrest from trade unions. For example, on 23 February a group of MPSA workers staged a protest in Panama City over the halt to operations, while the country’s main mining union, Unión de Trabajadores de Minera Panamá (Utramipa), called a protest to take place in Coclé’s capital, Penonomé, calling for an agreement to be reached.

Boost for government as fiscal deficit target met

A 2 March statement by international credit ratings agency Fitch, ahead of the deal between the government and FQM being struck, highlights the significance of the mine’s contribution to revenue, noting that US$375m is 0.5% of Panama’s GDP, which would make MPSA Panama’s second-largest tax contributor after the Panama Canal.

The same statement highlights that while Panama met its 2022 fiscal deficit target, this was helped by “circumstantial factors”. It warns that meeting “increasingly restrictive targets will be challenging in the absence of a clear consolidation strategy”. Fitch notes that preliminary data released on 15 February showed that Panama complied with the 4% of GDP deficit target set under its fiscal responsibility law (LRSF).

However, it is clear that this would have been missed without “one-off accounting factors”. These include the fact that the national statistics office completed its scheduled rebasing of GDP readings from 2007-2018, which led to a 3.5% increase in nominal GDP. Based on the government’s preliminary 2022 fiscal data, this cut the deficit by 0.23 percentage points of GDP.

Fitch also notes that a larger contribution came from a so-called “cashflow swap” executed with a commercial bank, which cut officially reported government interest payments by US$363.9m, without which higher interest expenditure would have kept the deficit above target, at around 4.5% of GDP.

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